Magazine article The CPA Journal

Update on State Tax Issues before the U.S. Supreme Court

Magazine article The CPA Journal

Update on State Tax Issues before the U.S. Supreme Court

Article excerpt

(Editor's Note: In the March 1992 The CPA Journal, Daniel O'Connell in his article "U.S. Supreme Court Reviews State and Local Taxation Issues," gave the details of three state tax issues presently before the Supreme Court. The following article presents an update on two of the three issues based upon oral arguments before the Court.)

On January 22, 1992, oral arguments were presented to the U.S. Supreme Court in Dakota v. Quill Corporation (Doc. No. 91-194) and Wisconsin Department of Revenue v. William Wrigley, Jr. Co. (Doc. No. 91-119). Although it is not possible to predict from these hearings how the Court will ultimately decide, the questions presented and comments made by the Justices give indication of the scope of the issues involved and which facts or considerations they consider to be important.


In Quill, the Court is reviewing its 1967 landmark decision in National Bellas Hess, v. Illinois Department of Revenue (386 U.S. 753), which held that a state cannot constitutionally impose the duty to collect use tax on sales to residents where the seller's only contacts with the state are through the mail or by common carrier. A decision overturning Bellas Hess would adversely affect non-collecting mail-order companies as well as retailers and other multistate corporations that advertise and deliver property into states or localities in which they have no physical presence.

In Wrigley, the Court is reviewing the decision of the Wisconsin Supreme Court that the activities of Wrigley in Wisconsin did not exceed "solicitation" within the meaning of Public law 86-272 to enable Wisconsin to impose its corporate income tax. A reversal of this decision would clarify the boundaries of the income tax protection provided by this federal statute.


Of key importance in this hearing were the urgent requests by Justices Kennedy and O'Connor that Quill's counsel clarify whether he was relying on the Interstate Commerce Clause or the Due Process Clause in arguing that the collection requirement was not constitutionally permitted. Upon clarification by counsel that he was arguing (at least primarily) that the imposition of collection responsibilities would unduly interfere with interstate commerce, Justice O'Connor confirmed that the issue is whether the tests established by Complete Auto Transit, Inc. v. Brady (430 U.S. 274, (1977)) permit the state to impose this duty. Complete Auto held that a state may impose a tax upon interstate commerce activities if the following requirements are satisfied:

1. The activity has substantial nexus to the state;

2. The tax is fairly apportioned;

3. The tax does not discriminate against interstate commerce; and

4. The tax is fairly related to the services provided by the state.

The crucial determination, therefore, is whether the regular or systematic solicitation of a consumer market without substantial physical contacts satisfies all of these requirements. The refinement of this issue may imply that due process considerations are satisfied by the economic exploitation of a marketplace through the mail or by common carrier. Justice White confirmed that North Dakota could subject Quill to personal (non-tax) jurisdiction in its courts to defend actions relating to the products sold.

Justice O'Connor was clearly concerned, however, that any decision overturning Bellas Hess could have retroactive effect and noted that Congress (in which the Constitution vests exclusive authority to regulate interstate commerce) was better suited to formulate a prospective-only rule of law. …

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